Bank of America’s $1.2B mortgage scam fine gets thrown out
A Manhattan federal appeals court struck again on Monday — making life a bit easier for those on Wall Street looking to cut corners.
The Second Circuit Court of Appeals reversed a jury’s finding that a unit of Bank of America committed fraud by dumping shoddy mortgages on government-sponsored Fannie Mae and Freddie Mac leading up to the financial crisis.
The court found that BofA’s Countrywide Financial unit — which sold the toxic mortgages despite promising to deliver only high-quality loans — didn’t commit fraud because the bad deeds happened after the contract was signed.
The 30-page ruling overturned a 2013 jury verdict and tosses the $1.27 billion penalty levied on BofA, which bought Countrywide in 2008.
It also overturned a $1 million civil penalty on Rebecca Mairone, a high-ranking Countrywide executive who was told by subordinates that the shoddy mortgages fell short of Fannie and Freddie’s quality requirements.
Mairone was told by subordinates the shoddy mortgages sold to both Fannie Mae and Freddie Mac didn’t meet the quality BofA had promised Uncle Sam, prosecutors told the jury during the trial. But despite the warning, Mairone “nonetheless sold them to [Fannie and Freddie],” Circuit Court Judge Richard Wesley wrote in the ruling.
But that sleight of hand, subbing bad mortgages for good, wasn’t enough to convince Wesley, a Bush appointee to the influential appeals court, that a fraud had occurred.
“[A] party claiming fraud must prove fraudulent intent at the time on contract execution,” Wesley wrote in the ruling. “[E]vidence of a subsequent, willful breach cannot sustain” a fraud finding.
Wesley likened the substitution of toxic loans for investment-grade mortgages more to a breach of contract — not fraud.
Prosecutors would have had to prove to the jury that, when Mairone and fellow Countrywide executives sold Fannie and Freddie the shoddy mortgages, the switcheroo was “actually made with contemporaneous fraudulent intent,” the 66-year- old jurist ruled.
Wesley, writing for a three-judge panel, did not say what other intent Mairone would have had to switch the mortgages.
Countrywide’s questionable-loan program was known as High Speed Swim Lane, under the acronym HSSL, which is pronounced “Hustle.”
“I think the Second Circuit appeals court is trying to clip the DoJ’s wings a little there,” said securities lawyer Bradley Simon. “It might cause them to think twice over using mail and wire fraud statute in civil cases.”
The reversal could also encourage companies to go to trial rather than settle, experts said.
A spokesman for Manhattan US Attorney Preet Bharara declined to comment.
Defense lawyers cheered the decision Monday, saying that the government’s use of mail and wire fraud has “spiraled out of control” in recent years.
“The government tried to take an allegation of a garden variety breach of contract case and turn it into a fraud,” said Mairone’s lawyer, Joshua Rosenkranz.
“The message here is that the government should stop looking for frauds where they don’t exist,” Rosenkranz said.
But Dennis Kelleher, president of nonprofit group Better Markets, slammed the ruling as “turning law, logic and common sense on its head.”
“This hyper-technical decision is not only a miscarriage of justice but also provides a road map for Wall Street to get away with more fraud in the future,” Kelleher said.
In December 2014, the same appeals court tied the hands of prosecutors when it ruled that traders in possession of obvious insider information, even if they used that information to gain millions in profits, could not be found guilty unless they knew the original tipper — sometimes two or three people removed — got a personal benefit in exchange for the tip.
Countrywide was run by Angelo Mozilo, a son of a Bronx butcher, whose very tanned face came to symbolize subprime lending.